extr-8k_20210209.htm
false 0001078271 0001078271 2021-02-09 2021-02-09

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of report (date of earliest event reported): February 9, 2021

 

EXTREME NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

Delaware

 

000-25711

 

77-0430270

(State or other jurisdiction

of incorporation)

 

(Commission

File No.)

 

(I.R.S. Employer

Identification No.)

 

6480 Via Del Oro

San Jose, California 95119

(Address of principal executive offices)

Registrant's telephone number, including area code:

(408579-2800

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

EXTR

 

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 


 

Item 2.02 Results of Operations and Financial Condition

On February 9, 2021, Extreme Networks, Inc. (the “Company”) issued a press release announcing certain financial results for the quarter ended December 31, 2020. A copy of the press release is furnished as Exhibit 99.1 to this report.

The information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 to this Current Report on Form 8-K, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information contained in this Item 2.02 and in the accompanying Exhibit 99.1 shall not be incorporated by reference into any registration statement or other document filed by the Company with the Securities and Exchange Commission, whether made before or after the date of this Current Report, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference to this Item 2.02 and Exhibit 99.1 in such filing.

 

 

Item 9.01 Financial Statements and Exhibits

(d) Exhibits.

 

           99.1

 

Press Release dated February 9, 2021.

           104     Cover Page Interactive Data File (embedded within the Inline XBRL document)


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: February 9, 2021

 

EXTREME NETWORKS, INC.

 

 

 

By:

 

/s/ REMI THOMAS

 

 

Remi Thomas

 

 

Executive Vice President, Chief Financial Officer (Principal Accounting Officer)

 

extr-ex991_6.htm

Exhibit 99.1

 

For more information, contact:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor Relations

 

 

 

Media Contact

 

Stan Kovler

 

 

 

Christi Nicolacopoulos

919/595-4196

 

 

 

603/952-5005

 

Investor_relations@extremenetworks.com

 

 

 

pr@extremenetworks.com

 

Extreme Networks Reports Second Quarter Fiscal Year 2021 Financial Results

Achieved Record Non-GAAP Gross Margin and Double-Digit Operating Profit

Reaffirms Q3 Business Outlook

 

SAN JOSE, Calif., February 9, 2021 -- Extreme Networks, Inc. (“Extreme”) (Nasdaq: EXTR) today released financial results for its second fiscal quarter ended December 31, 2020, which follows Extreme’s preliminary results reported on January 27, 2021. The company has finalized its quarter-end procedures and is reporting its final Q2 financial results.

 

Fiscal Second Quarter Results:  

 

 

Revenue $242.1 million, down 9% year-over-year and up 3% quarter-over-quarter

 

GAAP EPS $(0.02), up from ($0.20) in Q2 last year

 

Non-GAAP EPS $0.13, up from $0.11 in Q2 last year

 

GAAP gross margin 57.9% compared to 55.6% in Q2 last year

 

Non-GAAP gross margin 61.0% compared to 60.0% in Q2 last year  

 

GAAP operating margin 2.4% compared to (5.7)% in Q2 last year

 

Non-GAAP operating margin 10.2%, compared to 9.0% in Q2 last year

 

Net cash provided by operating activities of $38.0 million

 

Free Cash Flow of $33.0 million

“Our Q2 results reflect the strength of Extreme’s financial and business performance, despite the challenging operating environment. We reiterate our previously issued Q3 business outlook. We expect double-digit year-over-year revenue growth and margin expansion due to increased demand in the marketplace for our differentiated solutions in the second half of FY21,” stated Ed Meyercord, President and CEO of Extreme.

“Our final Q2 results are highlighted by 3% sequential revenue growth and record non-GAAP gross margins, driven by a third consecutive quarter of improvement in product gross margin. We achieved double-digit operating margin two quarters ahead of our prior expectations, with a 10.2% non-GAAP operating margin, and generated over $30 in million cash flow,” stated Remi Thomas, CFO of Extreme.

 


 


 

Fiscal Q2 2021 Financial Metrics:

(in millions, except percentages and per share information)

 

 

Q2 FY'21

 

 

Q2 FY'20

 

 

Change

 

GAAP Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

165.8

 

 

$

190.5

 

 

$

(24.7

)

 

 

(13

)%

Service and subscription

 

 

76.3

 

 

 

77.0

 

 

 

(0.7

)

 

 

(1

)%

Total net revenue

 

$

242.1

 

 

$

267.5

 

 

$

(25.4

)

 

 

(9

)%

Gross margin

 

 

57.9

%

 

 

55.6

%

 

230 bps

 

 

-

 

Operating margin

 

 

2.4

%

 

 

(5.7

)%

 

806 bps

 

 

-

 

Net loss

 

$

(3.1

)

 

$

(23.5

)

 

$

20.4

 

 

 

87

%

Net loss per diluted share

 

$

(0.02

)

 

$

(0.20

)

 

$

0.18

 

 

 

90

%

Non-GAAP Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

165.8

 

 

$

190.5

 

 

$

(24.7

)

 

 

(13

)%

Service and subscription

 

 

76.3

 

 

 

77.0

 

 

 

(0.7

)

 

 

(1

)%

Total net revenue

 

$

242.1

 

 

$

267.5

 

 

$

(25.4

)

 

 

(9

)%

Gross margin

 

 

61.0

%

 

 

60.0

%

 

100 bps

 

 

-

 

Operating margin

 

 

10.2

%

 

 

9.0

%

 

120 bps

 

 

-

 

Net income

 

$

16.0

 

 

$

13.1

 

 

$

2.9

 

 

 

22

%

Net income per diluted share

 

$

0.13

 

 

$

0.11

 

 

$

0.02

 

 

 

18

%

 

 

 

Q2 ending cash balance was $184.0 million, a decrease of $9.1 million from the end of Q1. This was primarily driven by cash usage of $42.5 million for financing activities, primarily due to full repayment of our revolving credit facility and principal payments on our term loan, along with $5.0 million for capital expenditures, partially offset by operating cash flow generation of $38.0 million.

 

Q2 accounts receivable balance was $128.2 million, with days sales outstanding of 49, an increase of 1 day from Q1 and a decrease of 6 days from Q2 last year.  

 

Q2 ending inventory was $49.8 million, a decrease of $6.0 million from Q1 and a decrease of $29.9 million from Q2 last year. The year-over-year and quarter-over-quarter decreases in inventory largely reflects improved demand planning, SKU rationalization and higher inventory turnover.

 

Q2 ending gross debt* was $356.3 million, a decrease of $39.8 million from the prior quarter. The decrease reflects the principal debt payment of approximately $4.8 million and payments of $35.0 million on the revolving credit facility. The $19.0 million decrease from Q2 last year resulted primarily from principal debt payments. Net debt* of $172.3 million decreased by $30.6 million from $202.9 million in Q1.

 

Since publishing its preliminary Q2 results on January 27, 2021, the Company has now finalized the estimate of its distributor rebate accrual and recorded an immaterial adjustment, which is incorporated in its Q2 reported financial results. This had no effect on quarterly cash flows.

 

Extreme uses the non-GAAP free cash flow metric as a measure of operating performance. Free cash flow represents GAAP net cash provided by operating activities, less purchases of property, plant and equipment.  Extreme considers free cash flow to be useful information for management and investors

 


 

regarding the amount of cash generated by the business after the purchases of property, plant and equipment, which can then be used to, among other things, invest in Extreme’s business, make strategic acquisitions, and strengthen the balance sheet. A limitation of the utility of this non-GAAP free cash flow metric as a measure of financial performance is that it does not represent the total increase or decrease in the Company's cash balance for the period. The following table shows non-GAAP free cash flow calculation (in thousands):

 

Free Cash Flow

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2020

 

 

December 31,

2019

 

 

December 31,

2020

 

 

December 31,

2019

 

Cash flow provided by operations

$

38,026

 

 

$

22,112

 

 

$

62,771

 

 

$

21,911

 

Less: PP&E CapEx spending

 

(5,016

)

 

 

(4,198

)

 

 

(8,039

)

 

 

(9,438

)

Total free cash flow

$

33,010

 

 

$

17,914

 

 

$

54,732

 

 

$

12,473

 

 

*Gross debt is defined as long-term and current portion of long-term debt as shown on the balance sheet plus unamortized debt issuance costs. Net debt is defined as gross debt minus cash, as shown in the table below (in millions):

 

Gross debt

 

 

Cash

 

 

Net debt

 

$

356.3

 

 

$

184.0

 

 

$

172.3

 

 

 

Business Outlook:

Extreme reiterates the Q3 business outlook initially provided on January 27, 2021. This business outlook is based on current expectations. The following statements are forward-looking, and actual results could differ materially based on various factors, including market conditions and the factors set forth under “Forward-Looking Statements” below.

 

For its third quarter of fiscal 2021, ending March 31, 2021, the Company is targeting:

 

(in millions, except percentages and per share information)

Low-End

 

 

High-End

 

FQ3'21 Guidance – GAAP

 

 

 

 

 

 

 

Total Net Revenue

$

240.0

 

 

$

250.0

 

Gross Margin

 

58.4

%

 

 

59.5

%

Operating Expenses

$

137.6

 

 

$

139.6

 

Operating Margin

 

1.1

%

 

 

3.7

%

Net Income (loss)

$

(5.5

)

 

$

1.1

 

Net Income (loss) per diluted share

$

(0.04

)

 

$

0.01

 

Shares outstanding used in calculating GAAP EPS

124.7

 

 

126.6

 

FQ3’21 Guidance – Non - GAAP

 

 

 

 

 

 

 

Total Net Revenue

$

240.0

 

 

$

250.0

 

Gross Margin

 

61.5

%

 

 

62.5

%

Operating Expenses

$

126.0

 

 

$

128.0

 

Operating Margin

 

9.0

%

 

 

11.3

%

Net Income

$

13.5

 

 

$

20.1

 

Income per diluted share

$

0.11

 

 

$

0.16

 

Shares outstanding used in calculating non-GAAP EPS

 

126.6

 

 

 

126.6

 

 

 

 


 

 

 

 

 

 

 

The following table shows the GAAP to non-GAAP reconciliation for Q3 FY’21 guidance:

 

 

Gross Margin

Rate

 

 

Operating

Margin Rate

 

 

Earnings per

Share

 

GAAP

58.4% - 59.5%

 

 

1.1% - 3.7%

 

 

$(0.04) - $0.01

 

Estimated adjustments for:

 

 

 

 

 

 

 

 

 

 

 

Amortization of product intangibles

2.4%

 

 

2.4%

 

 

 

0.05

 

Share-based compensation

0.3%

 

 

4.1%

 

 

 

0.08

 

Restructuring

 

 

 

0.3%

 

 

 

0.01

 

Amortization of non-product intangibles

0.3%

 

 

0.9%

 

 

 

0.02

 

Non-GAAP

61.5% - 62.5%

 

 

9.0% - 11.3%

 

 

$0.11- $0.16

 

 

The total of percentage rate changes may not equal the total change in all cases due to rounding.

 

About Extreme:

Extreme Networks, Inc. (EXTR) creates effortless networking experiences that enable all of us to advance. We push the boundaries of technology leveraging the powers of machine learning, artificial intelligence, analytics, and automation. Over 50,000 customers globally trust our end-to-end, cloud-driven networking solutions and rely on our top-rated services and support to accelerate their digital transformation efforts and deliver progress like never before. For more information, visit Extreme's website or follow us on Twitter, LinkedIn, and Facebook.

 

Extreme Networks, and the Extreme Networks logo, are trademarks of Extreme Networks, Inc. or its subsidiaries in the United States and/or other countries.   Other trademarks shown herein are the property of their respective owners.

 

Non-GAAP Financial Measures:

Extreme provides all financial information required in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company is providing with this press release non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP net income, non-GAAP net income per diluted share, and non-GAAP free cash flow. In preparing non-GAAP information, the Company has excluded, where applicable, the impact of share-based compensation, acquisition and integration costs, acquired inventory adjustments, amortization of acquired intangibles, inventory valuation adjustment, and restructuring charges.  The Company believes that excluding these items provides both management and investors with additional insight into its current operations, the trends affecting the Company, the Company's marketplace performance, and the Company's ability to generate cash from operations. Please note the Company's non-GAAP measures may be different than those used by other companies. The additional non-GAAP financial information the Company presents should be considered in conjunction with, and not as a substitute for, the Company's GAAP financial information.  

 

 


 

The Company has provided a non-GAAP reconciliation of the results for the periods presented in this release, which are adjusted to exclude certain items as indicated.  These measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures for comparable financial information and understanding of the Company's ongoing performance as a business. Extreme uses both GAAP and non-GAAP measures to evaluate and manage its operations.

 

 

 

Forward Looking Statements:

Statements in this press release, including statements regarding those concerning the company’s business outlook, future financial and operating results, and certain preliminary  financial results for the three months ended December 31, 2020 are forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this release. There are several important factors that could cause actual events to differ materially from those suggested or indicated by such forward-looking statements. These include, among others, the potential impact of any adjustment to the company’s distributor rebate accrual (and issues arising therefrom), changes resulting from the completion of the quarter-end review process, the company’s failure to achieve targeted revenues and forecasted demand from end customers; a highly competitive business environment for network switching equipment and cloud management of network devices; the company’s effectiveness in controlling expenses; the possibility that the company might experience delays in the development or introduction of new technology and products; customer response to the company’s new technology and products; risks related to pending or future litigation; macroeconomic and political and geopolitical factors, a dependency on third parties for certain components and for the manufacturing of the company’s products; and the impacts of COVID-19, and any worsening of the global business and economic environment as a result, on the company’s business.

 

More information about potential factors that could affect the Company's business and financial results are described in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020, Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, and other documents of the Company on file with the Securities and Exchange Commission (available at www.sec.gov).  As a result of these risks and others, actual results could vary significantly from those anticipated in this press release, and the company’s financial condition and results of operations could be materially adversely affected. Except as required under the U.S. federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission, Extreme disclaims any obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

 

###

 

 


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

December 31,

2020

 

 

June 30,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

183,969

 

 

$

193,872

 

Accounts receivable, net of allowance for doubtful accounts of $1,335 and $1,212, respectively

 

 

128,242

 

 

 

122,727

 

Inventories

 

 

49,830

 

 

 

62,589

 

Prepaid expenses and other current assets

 

 

41,257

 

 

 

35,019

 

Total current assets

 

 

403,298

 

 

 

414,207

 

Property and equipment, net

 

 

55,974

 

 

 

58,813

 

Operating lease right-of-use assets, net

 

 

45,087

 

 

 

51,274

 

Intangible assets, net

 

 

51,748

 

 

 

68,394

 

Goodwill

 

 

331,159

 

 

 

331,159

 

Other assets

 

 

58,571

 

 

 

55,241

 

Total assets

 

$

945,837

 

 

$

979,088

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt, net of unamortized debt issuance costs of $2,463 and $2,484, respectively

 

$

18,912

 

 

$

16,516

 

Accounts payable

 

 

53,677

 

 

 

48,439

 

Accrued compensation and benefits

 

 

62,212

 

 

 

50,884

 

Accrued warranty

 

 

13,073

 

 

 

14,035

 

Current portion, operating lease liabilities

 

 

19,226

 

 

 

19,196

 

Current portion, deferred revenue

 

 

198,291

 

 

 

190,226

 

Other accrued liabilities

 

 

56,851

 

 

 

58,525

 

Total current liabilities

 

 

422,242

 

 

 

397,821

 

Deferred revenue, less current portion

 

 

110,844

 

 

 

100,961

 

Long-term debt, less current portion, net of unamortized debt issuance costs of $5,934 and $7,165, respectively

 

 

328,941

 

 

 

394,585

 

Operating lease liabilities, less current portion

 

 

42,059

 

 

 

50,238

 

Deferred income taxes

 

 

2,650

 

 

 

2,334

 

Other long-term liabilities

 

 

21,176

 

 

 

27,751

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.001 par value, issuable in series, 2,000

shares authorized; none issued

 

 

 

 

 

 

Common stock, $0.001 par value, 750,000 shares authorized; 130,180 and 127,114 shares issued, respectively; 123,583 and 120,517 shares outstanding, respectively

 

 

130

 

 

 

127

 

Additional paid-in-capital

 

 

1,055,719

 

 

 

1,035,041

 

Accumulated other comprehensive loss

 

 

(2,670

)

 

 

(6,378

)

Accumulated deficit

 

 

(992,141

)

 

 

(980,279

)

Treasury stock at cost: 6,597 and 6,597 shares, respectively

 

 

(43,113

)

 

 

(43,113

)

Total stockholders’ equity

 

 

17,925

 

 

 

5,398

 

Total liabilities and stockholders’ equity

 

$

945,837

 

 

$

979,088

 

 


 

 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2020

 

 

December 31,

2019

 

 

December 31,

2020

 

 

December 31,

2019

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

165,845

 

 

$

190,492

 

 

$

327,241

 

 

$

375,626

 

Service and subscription

 

 

76,283

 

 

 

76,980

 

 

 

150,689

 

 

 

147,352

 

Total net revenues

 

 

242,128

 

 

 

267,472

 

 

 

477,930

 

 

 

522,978

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

74,005

 

 

 

91,387

 

 

 

147,400

 

 

 

182,778

 

Service and subscription

 

 

27,931

 

 

 

27,414

 

 

 

55,320

 

 

 

54,286

 

Total cost of revenues

 

 

101,936

 

 

 

118,801

 

 

 

202,720

 

 

 

237,064

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

91,840

 

 

 

99,105

 

 

 

179,841

 

 

 

192,848

 

Service and subscription

 

 

48,352

 

 

 

49,566

 

 

 

95,369

 

 

 

93,066

 

Total gross profit

 

 

140,192

 

 

 

148,671

 

 

 

275,210

 

 

 

285,914

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

49,186

 

 

 

55,380

 

 

 

98,710

 

 

 

114,496

 

Sales and marketing

 

 

66,732

 

 

 

75,436

 

 

 

131,057

 

 

 

146,793

 

General and administrative

 

 

16,360

 

 

 

15,098

 

 

 

32,821

 

 

 

30,080

 

Acquisition and integration costs

 

 

 

 

 

8,994

 

 

 

1,975

 

 

 

24,919

 

Restructuring and related charges, net of reversals

 

 

695

 

 

 

6,622

 

 

 

1,696

 

 

 

12,759

 

Amortization of intangibles

 

 

1,506

 

 

 

2,377

 

 

 

3,298

 

 

 

4,307

 

Total operating expenses

 

 

134,479

 

 

 

163,907

 

 

 

269,557

 

 

 

333,354

 

Operating income (loss)

 

 

5,713

 

 

 

(15,236

)

 

 

5,653

 

 

 

(47,440

)

Interest income

 

 

82

 

 

 

477

 

 

 

200

 

 

 

1,144

 

Interest expense

 

 

(6,068

)

 

 

(6,234

)

 

 

(12,731

)

 

 

(11,398

)

Other expense, net

 

 

(954

)

 

 

(748

)

 

 

(1,841

)

 

 

(190

)

Income (loss) before income taxes

 

 

(1,227

)

 

 

(21,741

)

 

 

(8,719

)

 

 

(57,884

)

Provision for income taxes

 

 

1,823

 

 

 

1,797

 

 

 

3,143

 

 

 

3,392

 

Net loss

 

$

(3,050

)

 

$

(23,538

)

 

$

(11,862

)

 

$

(61,276

)

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.02

)

 

$

(0.20

)

 

$

(0.10

)

 

$

(0.51

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculation - basic and diluted

 

 

123,264

 

 

 

119,555

 

 

 

122,485

 

 

 

119,891

 

 

 


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Six Months Ended

 

 

 

December 31,

2020

 

 

December 31,

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,862

)

 

$

(61,276

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

12,471

 

 

 

14,251

 

Amortization of intangible assets

 

 

16,646

 

 

 

17,772

 

Reduction in carrying amount of right-of-use asset

 

 

8,072

 

 

 

8,477

 

Provision for doubtful accounts

 

 

143

 

 

 

626

 

Share-based compensation

 

 

18,397

 

 

 

19,792

 

Deferred income taxes

 

 

628

 

 

 

801

 

Non-cash restructuring and impairment charges

 

 

-

 

 

 

7,622

 

Non-cash interest expense

 

 

2,171

 

 

 

1,982

 

Other

 

 

3,195

 

 

 

735

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,658

)

 

 

25,751

 

Inventories

 

 

6,340

 

 

 

3,157

 

Prepaid expenses and other assets

 

 

(3,740

)

 

 

(274

)

Accounts payable

 

 

4,913

 

 

 

(9,070

)

Accrued compensation and benefits

 

 

10,984

 

 

 

(3,036

)

Operating lease liabilities

 

 

(10,116

)

 

 

(9,051

)

Deferred revenue

 

 

17,949

 

 

 

6,181

 

Other current and long-term liabilities

 

 

(7,762

)

 

 

(2,529

)

Net cash provided by operating activities

 

 

62,771

 

 

 

21,911

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(8,039

)

 

 

(9,438

)

Business acquisitions, net of cash acquired

 

 

 

 

 

(219,458

)

Maturities and sales of investments

 

 

 

 

 

45,249

 

Net cash used in investing activities

 

 

(8,039

)

 

 

(183,647

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Term Loan

 

 

 

 

 

199,500

 

Payments on debt obligations

 

 

(64,500

)

 

 

(24,950

)

Loan fees on borrowings

 

 

 

 

 

(10,514

)

Equity forward contract

 

 

 

 

 

(4,821

)

Repurchase of common stock

 

 

 

 

 

(25,179

)

Proceeds from issuance of common stock, net of tax withholding

 

 

2,284

 

 

 

2,906

 

Payment of contingent consideration obligations

 

 

(1,021

)

 

 

(2,206

)

Deferred payments on an acquisition

 

 

(2,000

)

 

 

(2,000

)

Net cash (used in) provided by financing activities

 

 

(65,237

)

 

 

132,736

 

 

 

 

 

 

 

 

 

 

Foreign currency effect on cash

 

 

602

 

 

 

(193

)

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

 

(9,903

)

 

 

(29,193

)

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

193,872

 

 

 

169,607

 

Cash at end of period

 

$

183,969

 

 

$

140,414

 

 


 

 

Extreme Networks, Inc.

Non-GAAP Measures of Financial Performance

 

To supplement the Company's consolidated financial statements presented in accordance with U.S. generally accepted accounting principles, (“GAAP”), Extreme uses non-GAAP measures of certain components of financial performance.  These non-GAAP measures include non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating margin, non-GAAP operating income, non-GAAP net income, non-GAAP earnings per diluted share and non-GAAP free cash flow.

 

Reconciliation to the nearest GAAP measure of all historical non-GAAP measures included in this press release can be found in the tables included with this press release.  In this press release, Extreme also presents its target for non-GAAP operating expenses, which is operating expenses less share-based compensation expense, restructuring charges and amortization of acquired intangibles.

 

Non-GAAP measures presented in this press release are not in accordance with or alternative measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies.  In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles.  Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Extreme’s results of operations as determined in accordance with GAAP.  These non-GAAP measures should only be used to evaluate Extreme’s results of operations in conjunction with the corresponding GAAP measures.

 

Extreme believes these non-GAAP measures when shown in conjunction with the corresponding GAAP measures enhance investors' and management's overall understanding of the Company's current financial performance and the Company's prospects for the future, including cash flows available to pursue opportunities to enhance stockholder value.  In addition, because Extreme has historically reported certain non-GAAP results to investors, the Company believes the inclusion of non-GAAP measures provides consistency in the Company's financial reporting.

 

For its internal planning process, and as discussed further below, Extreme's management uses financial statements that do not include share-based compensation expense, acquired inventory adjustments, acquisition and integration costs, amortization of acquired intangibles, inventory valuation adjustments, and restructuring charges.  Extreme’s management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company's financial results.

 

As described above, Extreme excludes the following items from one or more of its non-GAAP measures when applicable.

 

Share-based compensation. Consists of associated expenses for stock options, restricted stock awards and the Company’s Employee Stock Purchase Plan.  Extreme excludes share-based compensation expenses from its non-GAAP measures primarily because they are non-cash expenses that the Company does not believe are reflective of ongoing cash requirement related to its operating results. Extreme expects to incur share-based compensation expenses in future periods.

Acquired inventory adjustments. Purchase accounting adjustments relating to the mark up of acquired inventory to fair value less disposal costs.

 


 

Acquisition and integration costs. Acquisition and integration costs consist of specified compensation charges, software charges, legal and professional fees related to the acquisition of Aerohive. Extreme excludes these expenses since they result from an event that is outside the ordinary course of continuing operations.

Amortization of acquired intangibles. Amortization of acquired intangibles includes the monthly amortization expense of intangible assets such as developed technology, customer relationships, trademarks and order backlog.  The amortization of the developed technology and order backlog are recorded in cost of goods sold, while the amortization for the other intangibles are recorded in operating expenses.  Extreme excludes these expenses since they result from an intangible asset and for which the period expense does not impact the operations of the business and are non-cash in nature.

 

Inventory valuation adjustments. Adjustments relating to the mark down of inventory due to duplication of products lines with acquisition of Aerohive net of recoveries on the sale of inventory marked down in previous quarters.

 

Restructuring charges. Restructuring charges primarily consist of severance costs for employees which have no benefit to continuing operations and impairment of right-of-use assets, long-lived assets and other charges related to excess facilities. Extreme excludes restructuring expenses since they result from events that occur outside of the ordinary course of continuing operations.

 

Income Taxes. Beginning with our first quarter of fiscal 2021, we are changing how we calculate our non-GAAP provision for income taxes in accordance with the SEC guidance on non-GAAP Financial Measures Compliance and Disclosure Interpretation.   Previously, the non-GAAP tax provision consisted of current and deferred income tax expense on a GAAP basis as if our carryforward net operating losses were sufficient to offset our non-GAAP adjustments.   Beginning with our first quarter of fiscal 2021, we have assumed our U.S. federal and state net operating losses would have been fully consumed by the historical non-GAAP financial adjustments, eliminating the need for a full valuation allowance against our U.S. deferred tax assets which consequently, enables our use of research and development tax credits which were previously not utilizable.  The non-GAAP tax provision will now consist of current and deferred income tax expense commensurate with the non-GAAP measure of profitability using our blended U.S. statutory tax rate of 24.2%.  We have adjusted the fiscal 2020 non-GAAP tax provision to reflect the 2020 non-GAAP operating results to be comparable with fiscal 2021 results.  As a result of this change, non-GAAP net income for the second quarter of fiscal 2020 changed from $0.13 per diluted share as previously reported to $0.11 per diluted share.

 

This change will not affect our non-GAAP income before income taxes, actual cash tax payments or cash flows, but will result in a higher or lower non-GAAP provision for income taxes depending on the level and jurisdictional mix of pre-tax income and available U.S. research and development tax credits.  As of June 30, 2020, we had U.S. federal net operating loss carryforwards of $310 million and state net operating loss carryforwards of $181 million.  We do not expect to pay substantial taxes on a GAAP basis in the U.S. for the foreseeable future due to our net operating loss carryforward balances.  Over the near term, most of our cash taxes will continue to be mainly driven by the tax expense of our foreign subsidiaries which amounts have not historically been significant, with the exception of the Company’s Irish operating company which has fully utilized available net operating loss carryforwards as of the second quarter of fiscal 2021.  We also believe our long-term effective GAAP tax rate will be lower than the U.S. statutory rate based upon our established tax structure.

 

 


 

 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

GAAP TO NON-GAAP RECONCILIATION

(In thousands, except percentages and per share amounts)

(Unaudited)

 

 

 

 

Revenues

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2020

 

 

December 31,

2019

 

 

December 31,

2020

 

 

December 31,

2019

 

Revenues - GAAP

$

242,128

 

 

$

267,472

 

 

$

477,930

 

 

$

522,978

 

 

Non-GAAP Gross Margin

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2020

 

 

December 31,

2019

 

 

December 31,

2020

 

 

December 31,

2019

 

Gross profit - GAAP

$

140,192

 

 

$

148,671

 

 

$

275,210

 

 

$

285,914

 

Gross margin - GAAP percentage

 

57.9

%

 

 

55.6

%

 

 

57.6

%

 

 

54.7

%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

753

 

 

 

907

 

 

 

1,383

 

 

 

1,504

 

Acquired inventory adjustments

 

 

 

 

3,434

 

 

 

 

 

 

7,303

 

Acquisition and integration costs

 

 

 

 

1,734

 

 

 

10

 

 

 

1,884

 

Amortization of intangibles

 

6,633

 

 

 

6,867

 

 

 

13,266

 

 

 

13,259

 

Inventory valuation adjustments

 

 

 

 

(1,169

)

 

 

 

 

 

3,677

 

Total adjustments to GAAP gross profit

$

7,386

 

 

$

11,773

 

 

$

14,659

 

 

$

27,627

 

Gross profit - non-GAAP

$

147,578

 

 

$

160,444

 

 

$

289,869

 

 

$

313,541

 

Gross margin - non-GAAP percentage

 

61.0

%

 

 

60.0

%

 

 

60.7

%

 

 

60.0

%

 

Non-GAAP Operating Income

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

2020

 

 

December 31,

2019

 

 

December 31,

2020

 

 

December 31,

2019

 

GAAP operating income (loss)

$

5,713

 

 

$

(15,236

)

 

$

5,653

 

 

$

(47,440

)

GAAP operating income (loss) percentage

 

2.4

%

 

 

(5.7

)%

 

 

1.2

%

 

 

(9.1

)%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense, cost of revenues

 

753

 

 

 

907

 

 

 

1,383

 

 

 

1,504

 

Share-based compensation expense, R&D

 

2,694

 

 

 

3,260

 

 

 

4,966

 

 

 

5,695

 

Share-based compensation expense, S&M

 

3,239

 

 

 

3,511

 

 

 

5,886

 

 

 

7,230

 

Share-based compensation expense, G&A

 

3,409

 

 

 

2,801

 

 

 

6,162

 

 

 

4,884

 

Inventory valuation adjustments

 

 

 

 

(1,169

)

 

 

 

 

 

3,677

 

Acquisition and integration costs

 

 

 

 

10,728

 

 

 

1,985

 

 

 

26,803

 

Restructuring charges, net of reversals

 

695

 

 

 

6,622

 

 

 

1,696

 

 

 

12,759

 

Acquired inventory adjustments

 

 

 

 

3,434

 

 

 

 

 

 

7,303

 

Amortization of intangibles

 

8,139

 

 

 

9,244

 

 

 

16,564

 

 

 

17,566

 

Total adjustments to GAAP operating income (loss)

$

18,929

 

 

$

39,338

 

 

$

38,642

 

 

$

87,421